There is a raging fire among government employees. They are asking for Old Pension System and don’t want anything to do with the New Pension System. Recently, a massive show of strength took place in Ramleela Maidan in Delhi. Millions of Government employees assembled here demanding that the government revert to Old Pension System or else be prepared to be voted out. The Godi Media, controlled by Modi Sarkar blanked out this protest and no media outlet gave it the prominence that it deserved.
To understand the issue let us first learn what is OPS and NPS.
Old Pension Scheme
General Provident Fund (GPF) facility
No deduction from salary for pension
Fixed pension on retirement i.e. 50% guarantee on the last salary
The entire pension is given by the government
On death during service, the dependent gets family pension and job
New Pension Scheme (NPS)
There is no General Provident Fund (GPF) facility
10 percent per month is deducted from the salary
Fixed pension is not guaranteed. It will be completely dependent on the stock market and insurance companies
The new pension will be given by insurance company. In case of any issues you have to deal with the insurance company
The benefit of inflation and pay commission will not be available.
When people join a service, any service, anywhere, the organization offers them some terms and conditions of service. Pension is one such benefit that organizations, especially government organizations offer. The lure of pension, lifetime payment, is one of the reasons why people join government service while many other better paying jobs are available. One can say that pension makes talented people work for the government.
So, where is the problem is servicing that benefit?
The problem is that during the period of employment, no government organization creates a corpus for paying these pensions once the employee retires. The cost of retirement is not factored into the cost of running the organization. Once the employee retires, the organization starts to feel the burden of paying for an employee who is no longer contributing to the revenue. Had the organization set aside a certain amount, while the employee was working and considered that as expense for the organization, it would have built a sufficient corpus for each retiring employee.
Under New Pension Scheme, the employee has to contribute 10% to his pension fund. This takes away money from his current salary for payout at some future date. His present lifestyle suffers. The organization contributes 14% to the same fund. If an employee has a salary of 50,000 per month (now common in most government jobs), then he pays 5,000 every month, 60,000 every year and over 20 years he pays 12,00,000 to his own fund. Under NPS, he can withdraw 60% of this on retirement and 40% is ‘invested’ is stock markets by Fund Managers. This 40%, which works to 4,80,000 is not guaranteed and is subject to market risk. If the stock prices fall, this 4,80,000 could be totally wiped away!
The organization contributes 7000 on a salary of 50,000, which works out to be 16,80,000. Out of this too 40% is risk. This works out to 6,72,000/-. Thus the employee can lose 11,52,000 if there is a stock market melt down out of his total corpus of 28,80,000/-. For a moment, let us assume that this money was put aside in a fixed deposit that earns 6% annual interest. The employee would get 1,72,000 as interest, which works out to 14,400!
Under Old Pension Scheme, he would get 50% of his last salary drawn without making any contribution during his employment. If an employee retires at a salary of 1,00,000 at the end of 20 years, he would get 50,000 pension every month, without any risk.
No wonder government employees are asking for Old Pension System!
The reason why Modi Sarkar is reluctant to go back to Old Pension System is that in the 10 years since NPS, assets under management have touched 10,00,000 Crores (Ten Lakh Crores).
NPS is SIP for Pension Fund Managers. Every month, Government employees and Government give money to Pension Fund Managers for investment in stock markets. This generates lot of income for fund managers as fees for the service.
Also, it allows Government to have control over a massive amount of money that can be used to manipulate the stock markets, where there is dearth of good investment opportunities. This money is fueling the stock markets. If this was to stop, NPS was to stop, the Pension Fund Managers would not have any SIP any more and government will lose its ability to manipulate the markets.
NPS is a goose that lays the golden egg, it can not be killed to extract all the eggs at once.
But there is a political cost with continuing with NPS. Congress has been able to win state elections in HP and Karnataka where OPS was a promise. Elections are due in five states and this massive demonstration has already led to Modi scrambling to limit the damage to his electoral prospects in these five states and in the coming General Elections in 2024. Some noises have started to emanate from the Government that it might do something on the subject. Until something concrete emerges, this rethink can best be considered another Jumla of Modi Sarkar. It does not look possible that the government employees will accept a modified solution, they are likely to stick to their demand for a Old Pension System, and that is going to crush Modi’s ego as he has been obstinately ignoring this growing storm.